Europe Stuff(ed)

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There is a lot of good stuff out about the European situation just now.

The Journal has another story on official plans for what to do if Greece leaves. It contains the usual stuff as well as a surprising anecdote that a UK currency printer is preparing for a revival of the Drachma (as its own initiative, of course), and this neat chart on liability split for the PIIGS (see below).

Krugman gets to the heart of the issue: a deposit run will break the system as it will exceed the system’s appetite for financial claims on Greece.

Right now, Greece is experiencing what’s being called a “bank jog” — a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again

The FT’s Wolf argues that a Greek exit would cause a shock that could only be offset by deeper integration.

His article begs the question – why are we not there, already, if it’s so obvious that all roads lead to integration? It is left unanswered – but i suppose that’s just politics.

Roubini frames the case for a Greek exit in terms of the need for a real currency depreciation (to boost NX and hence balance their capital account problem).

The first option, a sharp weakening of the euro, is unlikely, as Germany is strong and the ECB is not aggressively easing monetary policy. A rapid reduction in unit labor costs, through structural reforms that increased productivity growth in excess of wages, is just as unlikely. It took Germany ten years to restore its competitiveness this way; Greece cannot remain in a depression for a decade. Likewise, a rapid deflation in prices and wages, known as an “internal devaluation,” would lead to five years of ever-deepening depression

I think that an exit seems more likely than not just now. I cannot see how they can keep their Troika commitments (11bn of further budget cuts are due to be found in June), given the political and economic climate.

If they do not keep these commitments, further official financing is unlikely to be available. If this source of inflows stops, they will not be able to fund their massive current account deficit (IMF estimates ~8% of GDP in 2012) – which would cause a massive collapse in private and public spending.


Y = C + I + G + NX
Y = C + S + T


(S – I) + (T – G) = NX

Without official inflows, NX must shrink – and the only way to make NX smaller in this case will be to collapse I and G (as the economic downturn is likely to shrink S and T). The only alternative is to make exports more competitive and imports less attractive, which can really only be done by depreciating the currency … and that can only be done if they leave the EUR!